Households are now more debt-shy, but will it last?


As financial fallout from the pandemic continues, recent figures point to households becoming more conservative in borrowing and saving habits.

There has been a splurge in saving, a big drop in credit card debt and a rush by mortgage customers to lock in a cheaper home-loan interest rates.

Saving has surged since the pandemic, with households putting about $40  billion into bank deposits in recent months.


These are perfectly sensible responses to a crisis, but is this more cautious attitude a long-lasting shift in behaviour?

A standout feature of Australian households over the years has been their willingness to run up very large housing debts, to an extent that our households are among the most leveraged in the world. However, lately, people have been battening down the hatches in their financial decisions.


A record number of Australians decided to dump their bank and seek out a better mortgage deal in May as lenders slashed interest rates and offered thousands of dollars in cash payments to entice people to refinance existing loans.

New lending for the purchase of properties, in stark contrast, plunged by the most on record as householders instead focused on getting their budgets into shape.

The conservatism was also evident in credit card debt, which also plunged in May, with Canstar reporting a record $1.9 billion fall during the month.

Meanwhile, households have ploughed about $40 billion into bank deposits over the three months to May as many people slammed the brakes on spending and, in many cases, accessed their super early under the federal government's financial hardship scheme.

A key question is whether these represent lasting changes in financial attitudes or brief distortions caused by the interruption of the virus and government assistance. Will coronavirus break Australians' penchant for taking on big debts and turn us into bigger savers?

Some bankers have pointed out that consumers, especially the young, who have been harmed most financially by the crisis, may become more reluctant to take on big debts, just as earlier generations were scarred by the Great Depression.

The global financial crisis is also credited with creating a more debt-shy generation in the United States, where it had a more devastating economic impact.


It would not be surprising if the COVID-19 pandemic led to a more financially conservative mindset. But like so many trends at the moment, this one probably depends on how the crisis evolves.

Surprisingly, National Australia Bank's wellbeing survey, which includes questions on respondents' comfort with debt, shows people have become less anxious in recent months.

Dean Pearson, NAB's head of behavioural and industry economics, points out that consumers will distinguish between different types of debt and are generally quite comfortable with mortgage debt.

Even so, Pearson acknowledges that many consumers are being shielded from the full extent of the crisis by government income support, and the level of anxiety could change once assistance is wound back.

In the short term, at least, with so much uncertainty, it seems safe to assume people will be a bit more conservative for a while yet.

Commonwealth Bank chief Matt Comyn said saving was more is common in a crisis and the bank expected this to continue "for a period of time".

“People will spend money when they’ve got more confidence about their individual picture and confidence around their job, and what they think going to happen over the next period of time,” he said.

“I think it’s entirely understandable that people would build a bit more of a savings buffer."


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